Gazprom Neft – investing in the Arctic, and in effective technologies for developing tight oil

16 October 2018

Gazprom neft media breakfast (London)

Interview with first deputy CEO Vadim Yakovlev

KEY AREAS FOR BUSINESS DEVELOPMENT

The era of “easy oil” is now long gone. Fields discovered decades ago now see decreasing production: which is why it is important to look to the future and establish a solid basis for going forward. For Gazprom Neft, that means the Arctic, and hard-to-recover reserves. By developing new assets, Gazprom Neft plans to remain one of Russia’s leading companies in terms of oil production growth, to increase its potential for hydrocarbon production and to compete in the global arena.

The focus for development at Gazprom Neft is on non-traditional hydrocarbon deposits (reserves), offshore projects in the Arctic and Far East, major oil and gas condensate fields in the Yamal Peninsula, and the development of the company’s resource base in new production regions (Eastern Siberia, the Volga—Urals region, the Khanty-Mansi Autonomous Area and the Yamalo-Nenets Autonomous Area).

Domestically, Gazprom Neft’s main competitive advantage is its technological leadership, its capacity to implement unique complex projects, as well as ability to work with major international partners. In addition, Gazprom Neft is also a market leader in working year-round in challenging ice-bound and extreme weather conditions.

THE OPEC+ DEAL

According to the agreement with OPEC+, Gazprom Neft can increase its output, subject to constraints in oil production in Venezuela and Iran. The company’s production levels have recently reached those of October 2016 — preceding the OPEC initiatives to stabilise the market. Gazprom Neft is now looking at reserves, with a view to increase production by a further 20 — 30,000 barrels per day (bpd) in the short term, and by 50,000 bpd in the long-term (by end-2019), should the opportunity arise.

The terms of the OPEC+ agreement with regards to curtailing oil production are being applied conservatively (i.e. with a wide margin): the total cumulative production of participating countries stands at a far lower level than was envisaged under the 2016 agreement. Russia and other parties to the agreement are taking steps to compensate for these “lost” production volumes — which, as at summer 2017, were estimated at one million bpd. Gazprom Neft is keeping to its plans for hydrocarbon production to reach up to 100 million tonnes of oil equivalent (mtoe) and is committed to expanding this further in line with industry growth.

Given the continued rapid growth of global oil consumption and already high oil price, Gazprom Neft believes that it is highly unlikely that there will be any constraints for production growth in the next few years.

NEW PROJECTS AND INVESTMENTS

Gazprom Neft’s total investments over the next two to three years are expected to amount to RUB360—400 billion per year.

The Company is keen to expand its international operations, predominantly in regions, where it is already present. Gazprom Neft closely follows market opportunities as they arise and is ready to consider new acquisition proposals. Furthermore, the Company closely monitors the political situation in Iran and maintains its interest in projects in that country.

Domestically, Gazprom Neft will continue to develop its resource base around infrastructure in Western Siberia, allowing it to add a further 400 million tonnes of potential production to its balance sheet. The company is also interested in developing the Novoportovskoye field on the Yamal peninsula, as well as developing the “Yamal” gas project. The implementation of the Bazhen (Khanty-Mansi Autonomous Area) and Domanik (Orenburg) technology projects will continue, increasing recoverable reserves by 70 million tonnes.

New fields are expected to be developed around the existing infrastructure in the next few years including the Zapadno-Zimnee field, the Otdalennaya group of fields, and the Meretoyakhinskoye field.

DEVELOPING THE ARCTIC

Gazprom Neft has already developed a range of unique projects in the Arctic, including the Novoportovskoye, Prirazlomnoye and Messoyakha fields. Essential production and transportation infrastructure is now in place, including infrastructure to facilitate year-round sea shipments of oil (which incorporates Gazprom Neft’s own fleet of icebreakers and tankers).

Gazprom Neft’s production in the Arctic in the first eight months of 2018 already accounts for 27 percent of the Company’s total production.

The results achieved, including experience of working in challenging climatic conditions, mean the Company can view the future development of the Arctic with some optimism. Preparations for launching a further range of major hydrocarbon production projects are currently ongoing. These are, primarily, projects in the north of the Yamalo-Nenets Autonomous Area: the Yamal gas project, as well as a project to establish a new production centre in the Nadym-Pur-Tazovsky region, with the Company planning to develop a key production hub here in the next five to seven years.

Developing projects in the Arctic,a significant proportion of which are offshore, is one of the Company’s strategic priorities. The Neptune field was discovered offshore away from the Sakhalin Island (which has a climate similar to that of the Arctic) in 2017; with reserves in place exceeding 400 million tonnes of oil. This can be regarded as one of the most important discoveries in 2017 worldwide.

The Company continues to explore the geological potential of offshore projects, including those located in the Arctic. Gazprom Neft is undertaking seismic exploration and exploratory drilling at a second promising structure near the Sakhalin Island. A successful discovery would mean the development of a new promising offshore production region.

Offshore seismic works are currently being undertaken with a view to explore Silurian—Devonian deposits at the Prirazlomnoye field. If the hydrocarbon-bearing potential of the underlying beds are confirmed, Gazprom Neft will use reserve slots on the Prirazlomnaya offshore platform (rig) to drill additional wells and extend plateau production at this field.

In terms of the Company’s promising offshore projects, the latest estimate regarding a viable oil price for these ranges from $50 to $70 dollars per barrel. The significant range is due to the projects’ variable complexity, arising from their respective geographic locations, and the technology used in each case.

TECHNOLOGICAL DEVELOPMENT

Gazprom Neft updated its Technology Strategy in 2018, focusing on those major technological projects (technological ‘keys’) that will allow the business to develop new fields efficiently.

One such technological ‘key’ concerns technology to develop fields in Yamal. Projects in this region are marked by their complex composition, and the presence of alternating beds, containing gas, gas condensate and oil — so-called “multi-component” deposits. Some fields are subject to abnormally high reservoir pressure, of up to 700 atmospheres. To this end, the Company’s technology portfolio includes the development of technologies facilitating effective well construction under such conditions. Similarly, infrastructure solutions from Gazprom Neft facilitate an effective utilisation of associated petroleum gas (APG) — for example, in reinjecting oil-bearing strata for enhanced oil recovery (EOR).

Technology is also being proactively developed at the Company’s other major Arctic assets — at the Novoportovskoye and Messoyakhskoye fields — where extensive drilling of multilateral wells (with 28 such wells having been drilled so far) is being undertaken in Russia for the first time.

The construction of all of Gazprom Neft’s high-technology wells is managed from a single, integrated Drilling Support Centre in St Petersburg. The proportion of high-technology wells in Gazprom Neft’s production drilling portfolio is more than 60 percent — making the Company the market leader in Russia’s oil and gas industry. Up to 25 to 30 wells are in operation at a time, and up to 700 to 800 over the course of a year — making it possible to achieve a high degree of accuracy (92 percent) in narrow strata.

The Company is also developing unique cognitive support systems for drilling, seismic interpretation, and well-logging curves. These involve collaborative work between Gazprom Neft, IBM and SkolTech, based around artificial intellect (AI), predictive analysis, Big Data and more. Cognitive technology in geological prospecting makes it possible to obtain 30 percent more information than through conventional approaches. Gazprom Neft specialists have “trained” AI resources in automated (self-directed) searches on oil-bearing blocks, following training on data processed by specialists — as a result of which the Company has seen a radical improvement in the speed of geological prospecting works. Cognitive electronic “assistants” have produced solutions that would have taken some human months or even years.

Alongside IBM, Gazprom Neft has also developed a strata management technology, the result of which has since become a Gazprom Neft software application, OptimA (Optimisation of Asset). Based on a digital model of the field, this programme assesses various well interventions and selects the best of these, taking into account not just their effectiveness in terms of field development, but also their economic (cost) efficiency.

In the short term, Gazprom Neft’s R&D capabilities will be focussed on developing integrated technologies for the profitable development of the Bazhenov Formation. The company has, in particular, developed the world’s first hydraulic fracturing (fracking) simulator at this formation. Gazprom Neft is now drilling the first dozen wells at the Bazhenov Formation in order to develop the optimum working strategy here.

INTERNATIONAL COOPERATION

Gazprom Neft expects to further develop relationships with existing international partners including Shell, Repsol, and Mubadala Petroleum. The Company is interested in developing cooperation with strategic partners of Gazprom Group, such as, OMV and Wintershall. Gazprom Neft is also in negotiations with a range of other promising partners in Europe, Asia and the Far East.

Gazprom Neft is interested in projects where its unique expertise can be applied — in working with complex geology, in design engineering for multi-phase fields with low-permeability reservoirs, and in integrated systems engineering for field development. Key priorities for collaboration include high-technology drilling, enhanced oil recovery (EOR) methodologies, and the use of machine learning.

The Company’s strategy is based on ensuring sustainable operations in any environment. This is one of the most important factors of the economic attractiveness of joint projects with Gazprom Neft for international partners. The Company’s portfolio already includes a range of joint ventures in Russia with companies including Shell, Repsol and Mubadala Petroleum, as well as internationally with Petronas, Turkish Petroleum, Kogas and WesternZagros. In addition , Gazprom Neft is developing technological collaboration with IBM, Yokogawa, Saudi Aramco, OMV and JOGMEC.

Gazprom Neft is witnessing increasing interest from international investors in its domestic projects. The Company has a large and cost-effective resource base, with considerable potential for development. The Company’s Russian projects have proved their sustainability in the period of low oil prices: while drilling activity decreased everywhere in the world, Gazprom Neft made no such cutbacks and continued to make major investment decisions.